A New York Division of Tax Appeals administrative law judge held that a fleet management company that leases fleets of vehicles to businesses in New York could not receive sales tax credits for refunds of tax paid to vehicle lessees at the end of their leases after a rental adjustment that reduced the total rent paid under the lease.

Each of the company’s lease agreements contained a “terminal rental adjustment clause” provision. Under this provision, the aggregate rental amount due under the lease agreement— initially calculated, for purposes of determining the monthly rental amount, based on the projected residual book value of the leased vehicle at the termination of the lease agreement—adjusts up or down at the expiration of the lease based on the actual residual book value. In cases where the actual residual book value is greater than estimated, resulting in a reduction of the aggregate rental amount and thus a refund of rent to the lessee, the company also refunded the sales tax paid by lessee and subsequently claimed sales tax credits on the refunded tax amounts.

The administrative law judge held that “the New York sales tax is a transaction tax and liability for the tax occurs at the time of the taxable transaction.” Citing New York Tax Law section 1111(i)(B), the judge observed that for leases with characteristics similar to the ones at issue, the lessee is obligated to pay all sales tax on the first 32 months of the lease at the inception of the lease. The administrative law judge noted that: (1) the company “properly collected and paid tax on the first 32 months of the leases at the beginning of the leases,” and (2) New York Tax Law section 1111(i)(B) does not contain any provision allowing for a refund of sales tax paid. Thus, the administrative law judge held that the company was not entitled to receive sales tax credits in connection with the refunds of sales tax paid to its lessees.